Executive Briefings

Failure of Small Suppliers Can Have a Big Impact on Your Supply Chain

Major suppliers to the big automotive and aerospace manufacturers are dropping like flies. Lear Corp. recently joined the parade of Tier 1 auto suppliers to seek protection under Chapter 11 of U.S. bankruptcy law. Another, Visteon Corp., will receive at least $125m in financing from Ford Motor Co., which has seen the number of its suppliers entering Chapter 11 more than double over the past year. Boeing Co. reportedly is in talks to acquire a North Carolina facility of Vought Aircraft International, which is making part of the fuselage for the long-delayed 787 Dreamliner. Similar deals could follow, as Boeing rethinks its policy of outsourcing major assemblies and components of the 787 to independent providers.

In the manufacturing sector today, it's the large-scale vendor failures that seem to grab most of the headlines. But smaller entities can pose big problems, too. They represent a good portion of the "hidden costs" that plague a supply chain in tough economic times, according to Jim Lawton, senior vice president in the Supply Management Solutions business of D&B. "Often the suppliers that have financial insolvency issues are not those in the top 5 to 10 percent of your supply base," he says. Companies tend to be in more frequent communication with their top-tier vendors, and are therefore more aware of issues that might crop up among those suppliers. What's more, their higher public profile means that they can't easily hide financial woes.

Yet the loss of any link in the chain can saddle an OEM with huge costs, Lawton notes. Companies will scramble to maintain continuity of supply, so that their customers don't feel any effects. That could mean paying a supplier's bills, or even acquiring it outright. As supply chains get leaner, there is less of a chance that the manufacturer will have an alternative source of supply to which it can quickly turn.

One problem, Lawton says, is the time it takes for problems within one tier to be fully understood in the next. By the time a struggling supplier gets around to informing its most immediate partner, the damage is already done. Further delays in the relaying of critical information occur with each successive link in the chain. "It's the equivalent of the bullwhip effect," says Lawton. "As information works its way down the supply chain, it takes away valuable time from people down the stream to make decisions."

But companies can't wait for the truth to trickle down. "They're realizing the need to personally take responsibility for all suppliers in the network," says Lawton. And that means keeping a close eye on all partners, large and small, even if information about their economic health isn't publicly available. They have to rely on a combination of hard facts and predictive indicators, as laborious at the process might be.

No one should be surprised about events in the automotive industry today, with General Motors and Chrysler struggling to reorganize as their suppliers founder. But Lawton worries that the heavy costs associated with supplier failures are now being felt in sectors that were supposed to be more stable, such as well-funded electronics manufacturers. Even worse, he says, is the fact that no replacement for that lost capacity is in sight.

"This recession has been so deep," he says, "that in some cases there have been permanent losses in capacity." When the economy turns around, manufacturers won't be able to satisfy the surge in demand for new product - all because a bunch of small upstream suppliers have gone into the tank. In response, smart companies are looking to lock up shrinking pools of raw materials now. The alternative, Lawton says, is a dreaded "double-dip" recession.

The task of keeping tabs on suppliers far up the chain isn't easy; it's still heavily manual from a process standpoint. Lawton sees hope in the form of new social-networking technology, but that option is far from mature in the business-to-business arena. "We don't see a lot of major implementations," he says. "We're figuring out how to understand it in a more automated way." More information is available at www.dnb.com.

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Major suppliers to the big automotive and aerospace manufacturers are dropping like flies. Lear Corp. recently joined the parade of Tier 1 auto suppliers to seek protection under Chapter 11 of U.S. bankruptcy law. Another, Visteon Corp., will receive at least $125m in financing from Ford Motor Co., which has seen the number of its suppliers entering Chapter 11 more than double over the past year. Boeing Co. reportedly is in talks to acquire a North Carolina facility of Vought Aircraft International, which is making part of the fuselage for the long-delayed 787 Dreamliner. Similar deals could follow, as Boeing rethinks its policy of outsourcing major assemblies and components of the 787 to independent providers.

In the manufacturing sector today, it's the large-scale vendor failures that seem to grab most of the headlines. But smaller entities can pose big problems, too. They represent a good portion of the "hidden costs" that plague a supply chain in tough economic times, according to Jim Lawton, senior vice president in the Supply Management Solutions business of D&B. "Often the suppliers that have financial insolvency issues are not those in the top 5 to 10 percent of your supply base," he says. Companies tend to be in more frequent communication with their top-tier vendors, and are therefore more aware of issues that might crop up among those suppliers. What's more, their higher public profile means that they can't easily hide financial woes.

Yet the loss of any link in the chain can saddle an OEM with huge costs, Lawton notes. Companies will scramble to maintain continuity of supply, so that their customers don't feel any effects. That could mean paying a supplier's bills, or even acquiring it outright. As supply chains get leaner, there is less of a chance that the manufacturer will have an alternative source of supply to which it can quickly turn.

One problem, Lawton says, is the time it takes for problems within one tier to be fully understood in the next. By the time a struggling supplier gets around to informing its most immediate partner, the damage is already done. Further delays in the relaying of critical information occur with each successive link in the chain. "It's the equivalent of the bullwhip effect," says Lawton. "As information works its way down the supply chain, it takes away valuable time from people down the stream to make decisions."

But companies can't wait for the truth to trickle down. "They're realizing the need to personally take responsibility for all suppliers in the network," says Lawton. And that means keeping a close eye on all partners, large and small, even if information about their economic health isn't publicly available. They have to rely on a combination of hard facts and predictive indicators, as laborious at the process might be.

No one should be surprised about events in the automotive industry today, with General Motors and Chrysler struggling to reorganize as their suppliers founder. But Lawton worries that the heavy costs associated with supplier failures are now being felt in sectors that were supposed to be more stable, such as well-funded electronics manufacturers. Even worse, he says, is the fact that no replacement for that lost capacity is in sight.

"This recession has been so deep," he says, "that in some cases there have been permanent losses in capacity." When the economy turns around, manufacturers won't be able to satisfy the surge in demand for new product - all because a bunch of small upstream suppliers have gone into the tank. In response, smart companies are looking to lock up shrinking pools of raw materials now. The alternative, Lawton says, is a dreaded "double-dip" recession.

The task of keeping tabs on suppliers far up the chain isn't easy; it's still heavily manual from a process standpoint. Lawton sees hope in the form of new social-networking technology, but that option is far from mature in the business-to-business arena. "We don't see a lot of major implementations," he says. "We're figuring out how to understand it in a more automated way." More information is available at www.dnb.com.

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